The mood among the banking and broader business community at the World Economic Forum in Davos this January was noticeably more upbeat than it was a year ago, and the reasons are not hard to discern: the steady interest rate hikes of the past two years seem to be softening, financial markets and business leaders are both sensing a greater possibility for a soft landing for the economy, and consumer spending—especially in the United States—is proving more resilient than many had expected.
Yet, at the same time, nobody I met in Davos was throwing caution to the wind. Quite the contrary: I was struck by the way in which the dialogue among business leaders was being shaped so deeply by the notion of “uncertainty” and resilience as companies actively look for ways to deal with a range of disruptive potential scenarios. All of these involve a higher degree of geopolitical, macroeconomic, and technologicaldislocation.
Below, I lay out five themes from Davos that stuck with me, and that elaborate on this idea of how our Banking clients can think about building resilience in this environment of uncertainty.
- The strains of geopolitical tension, trade concentration, and global interconnectedness
Much ink has been spilled about globalization going into reverse, and while there is some truth to the idea of global retrenchment, our interconnectedness remains a dominant aspect of the global economy, for better and for worse. This was a viscerally felt sentiment throughout the week in Davos. Recent research by the McKinsey Global Institute has shown that significant amounts of trade are concentrated because of economy-specific choices; for example, while many countries export wheat, most economies’ inbound trade for this commodity relies on only a small number of these sources. An additional 10 percent of trade—including goods as diverse as laptops, soy, and iron ore—have only relatively few export production sources. The implications for supply chains of this degree of concentration are very significant, and clearly top of mind for many CEOs at Davos given the state of the world. Much discussion also focused on the role of China and various significant upcoming elections (in the US, India and beyond).
Banks and other financial institutions have a particularly important role to play here, thanks to their privileged position at the heart of global trade, sustainability finance, supply chains, transaction banking, payments, regulatory movements, and more. Indeed, many felt that the banks uniquely have their finger on the pulse of the global economy, and should be among the first to detect challenges and identify patterns for value creation in this interconnected world. This idea of the financial sector being so central commands respect—and marks a refreshing change from the perception of the industry coming out of the 2008 global financial crisis.
- Fragility and resilience
The business leaders I met in Davos are more hopeful about a soft landing, but many feel it is still too early to call. The macroeconomic picture remains one marked by fragility, despite the interest rate trajectory, which has helped lift banks’ net interest income, as we discussed in our 2023 Global Banking Annual Review. The outlook varies widely by country, with some of the strongest economies of the past decade now seemingly gripped by softness. That said, delegates at Davos were pleasantly surprised by the resilience of the global consumer and their continued level of spending, although people are being more thoughtful about what they are spending on. As bankers also well know, savings have been heavily depleted over the past year and consumer delinquencies are back up to pre-pandemic levels, so the outcome is far from certain. There was a clear sense that, in this environment, banks need to up the ante on developing their “house view” – a perspective on a range of scenarios on how things many play out geopolitically and macroeconomically. While predicting with accuracy is a fool’s errand, there is a huge resilience premium on being prepared to pivot the company rapidly as different scenarios evolve).
- Identifying and preparing for “crucible moments”
One of the most memorable events I attended in Davos was a breakfast with three CEOs hosted by McKinsey’s Global Managing Partner, Bob Sternfels, at which there was considerable discussion of “crucible moments”—pivotal decisions or events that can shape the future of a company—and how to prepare for them. The discussion was fascinating, and I came away from it with two major implications. First, as the degree of geopolitical and macroeconomic uncertainty has risen, business leaders increasingly recognize that they need to be prepared for a wide range of eventualities and able to adapt and redirect their companies depending on which of the scenarios manifests (as described above). Second, CEOs felt they will need to find ways to spend less personal time on execution matters and relatively more time on watching for, spotting, and thinking about, these crucible moments (e.g., M&A, new product builds, making seminal talent hires, and transformative innovation priorities).
- AI and gen AI beyond the hype
A year ago at this time, most of the business leaders I talked with had not heard of ChatGPT. This year at Davos, it was almost impossible to have a conversation at which AI, including generative AI, didn’t come up: it’s a giant theme that has captured the imagination of the business world and is widely viewed as a core ingredient of our global productivity opportunity. One CEO I spoke with put it best: “Even though I believe AI has been overhyped in the past few months, that does not make it any less significant of an opportunity for us.” The bigger questions for the financial services community and others will be how to scale—and alone or in partnership? And for banks and insurers that are subject to substantial regulation, a key question will be how to think about human intelligence working in tandem with AI. Banks will not rely exclusively on AI to make decisions; the trick will be how to blend human intelligence with the technology. For example, do you allow the algorithm to pull in data from myriad sources first, or do you feed it with internal bank-generated data and then figure out what the outside world can do to supplement that? How will regulation of AI evolve in the coming years?
- The leadership imperative
To work through all these issues, including but not only preparing for crucible moments, CEOs will need to refocus their time and energy. The leadership imperative in this uncertain age will be, first, to focus on human capital and talent, picking the right people for key roles. How else will you hope to make AI work in your organization? Second, how and with whom do you build partnerships and develop ecosystems? Several CEOs reflected that it was now much more important to figure out the bank’s ecosystem and partnering strategy at the top of the house, especially as it pertains to the technology stack, since no institution can “go it alone” on this front. And third, staying on the bleeding edge of new developments in tech and AI was cited as an important new priority by several attending CEOs. As the CEO, you need to keep up personally with what is happening. The landscape is changing too fast to remain a novice.
I return from Davos with great excitement about 2024 and the opportunities for us to help our Banking clients have impact on these fronts. I remain utterly confident in our ability to truly move the needle with our clients on these issues. We can make a big difference together. And truthfully, I am also looking forward to catching up on a bit of sleep!
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As someone deeply immersed in the financial sector and the world of economic forums, the content of this article resonates with my extensive expertise. The author highlights key observations and trends discussed at the World Economic Forum in Davos, providing valuable insights into the current state of the global economy and the banking industry. Let's break down the concepts used in the article:
Interest Rate Hikes and Economic Outlook:
- The author mentions the positive shift in mood compared to the previous year, attributing it to the softening of interest rate hikes over the past two years.
- Financial markets and business leaders are optimistic about the possibility of a soft landing for the economy.
- Resilient consumer spending, especially in the United States, contributes to the positive sentiment.
Uncertainty and Resilience:
- The overarching theme in discussions among business leaders is the pervasive "uncertainty" caused by geopolitical, macroeconomic, and technological dislocation.
- Companies are actively seeking ways to build resilience in the face of disruptive potential scenarios.
Globalization and Trade Concentration:
- Despite talk of globalization going into reverse, the article emphasizes that global interconnectedness remains a dominant aspect of the economy.
- Research by the McKinsey Global Institute indicates significant trade concentration, with implications for supply chains and the need for strategic planning.
Role of Banks in Global Dynamics:
- Banks and financial institutions are recognized for their crucial role in global trade, sustainability finance, supply chains, transaction banking, payments, and regulatory movements.
- The perception of the financial sector has evolved positively since the 2008 global financial crisis.
Fragility and Resilience in the Macroeconomic Landscape:
- While there is hope for a soft landing, the macroeconomic picture is marked by fragility, varying widely by country.
- Business leaders acknowledge the need to develop a "house view" and be prepared to pivot rapidly in response to different geopolitical and macroeconomic scenarios.
- The concept of "crucible moments" is introduced—pivotal decisions or events that can shape a company's future.
- Business leaders are recognizing the importance of being prepared for a wide range of eventualities and adapting their companies accordingly.
AI and Generative AI:
- The article highlights the significant shift in focus on AI, including generative AI, which has become a core element of the global productivity opportunity.
- Questions arise about how to scale AI, whether alone or in partnership, and how to blend human intelligence with technology, particularly in the context of substantial regulation.
- The imperative for leadership in this uncertain age includes a focus on human capital and talent, building partnerships and ecosystems, and staying on the bleeding edge of tech and AI developments.
- CEOs are advised to prioritize understanding the bank's ecosystem and partnering strategy, especially regarding the technology stack.
The article concludes by emphasizing the leadership imperative in navigating these challenges and expressing confidence in making a positive impact on the banking industry in 2024. The insights presented reflect a nuanced understanding of the economic landscape and the role of financial institutions in shaping the future.